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Bankruptcy Reform and Credit Cards Michelle J. White F rom 1980 to 2004, the number of personal bankruptcy filings in the United States increased more than five-fold, from 288,000 to 1.5 million per year. By 2004, more Americans were filing for bankruptcy each year than were graduating from college, getting divorced, or being diagnosed with cancer. A number of rich and famous people also filed for bankruptcy, which generated enormous publicity, raised public awareness of bankruptcy as a way to avoid repaying one’s debts, and suggested that bankruptcy was no longer subject to social disapproval. Famous bankrupts include former Governor of Texas John Connally, corporate raider Paul Bilzerian, actor Burt Reynolds, actresses Debbie Reynolds and Kim Basinger, rapper MC Hammer, singer Merle Haggard, U.S. baseball commissioner Bowie Kuhn, and boxer Mike Tyson (according to ͗http://www. angelfire.com/stars4/lists/bankruptcies.html͘, 2007). Lenders responded with a major lobbying campaign for bankruptcy reform that lasted nearly a decade and cost more than $100 million. Their efforts were unsuccessful during the 1990s, but in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law. It made bankruptcy law much less debtor-friendly. Personal bankruptcy filings surged to two million in 2005 as debtors rushed to file under the old law and then fell sharply to 600,000 in 2006. This paper begins with a discussion of why personal bankruptcy rates rose, and will argue that the main reason is the growth of “revolving debt”—mainly credit card debt. Indeed, from 1980 to 2004, revolving debt per household increased nearly five-fold in real terms, rising from 3.2 to 12.5 percent of U.S. median family y Michelle J. White is Professor of Economics, University of California, San Diego, La Jolla, California, and Research Associate, National Bureau of Economic Research, Cambridge, Massachusetts. Her e-mail address is ͗miwhite@ucsd.edu͘. Journal of Economic Perspectives—Volume 21, Number 4 —Fall 2007—Pages 175–199 income. As of 2004, households that held credit card debt had an average revolving debt level of $15,150, and the average bankruptcy filer had credit card debt of $25,000. 1 Table 1 shows real revolving debt per household and the number of personal bankruptcy filings from 1980 to 2006. The paper then discusses how the Bankruptcy Abuse Prevention and Con- sumer Protection Act (BAPCPA) of 2005 altered the conditions of bankruptcy. Prior to 2005, bankruptcy law provided debtors with a relatively easy escape route, and many ended up having their credit card and other debts discharged (forgiven) in bankruptcy. The new bankruptcy legislation made this route less attractive by increasing the costs of filing and forcing some debtors to repay from post- bankruptcy earnings. However, making bankruptcy law less debtor-friendly will not solve the prob- lem of consumers borrowing too much. After all, when less debt is discharged in bankruptcy, lending becomes more profitable, and lenders have an incentive to offer more credit cards and larger lines of credit. In fact, during the first year that BAPCPA was in effect, revolving debt per household rose by 5.3 percent in nominal terms—higher than the rate of increase during any of the previous five years. This essay considers the balances that need to be struck in a bankruptcy system and how the U.S. bankruptcy system strikes these balances in comparison with other coun- tries. I argue that a less debtor-friendly bankruptcy policy should be accompanied by changes in bank regulation and truth-in-lending rules, so that lenders have a greater chance of facing losses when they supply too much credit or charge excessively high interest rates and fees. Why Did Personal Bankruptcy Filings Increase? There are two main questions about the causes of bankruptcy filings: Why do people file for bankruptcy? And what caused the U.S. bankruptcy filing rate to increase so dramatically between 1980 and 2004? Adverse Events One set of potential causes of bankruptcy is adverse events—such as job loss, health problems/high medical costs, and divorce—that reduce debtors’ incomes or increase their living costs. Some researchers argue that adverse events explain most bankruptcy filings. Using data from surveys of bankruptcy filers, Sullivan, Warren, and Westbrook (2000) claimed that 67 percent of bankrupts filed because of job loss, and Himmelstein, Warren, Thorne, and Woolhandler (2005) claimed that 1 The average revolving debt of households that hold credit card debt is calculated assuming that 76 percent of households have credit cards and 63 percent of cardholders have credit card debt (Johnson, 2005; Laibson, Reppetto, and Tobacman, 2003). Debt of households in bankruptcy is based on a sample of filings in 2003 (Zhu, 2007). 176 Journal of Economic Perspectives 55 percent of bankrupts filed because of illness, injury, or medical bills. But these findings have been criticized as exaggerated, because the first study treated job loss as a cause of bankruptcy even if debtors quickly obtained new jobs and the second study treated health care expenditures as a cause of bankruptcy even when these expenditures were modest. 2 Other evidence suggests that adverse events play a much less important role in explaining bankruptcy filings. In 1996, the Panel Study of Income Dynamics (PSID), a panel dataset that represents all U.S. households, asked its respondents whether they had ever filed for bankruptcy and, if so, why. Among bankruptcy filers, only 21 percent gave job loss as their primary reason for filing, and only 16 percent gave illness, injury, or medical costs as their primary reason. In Fay, Hurst, and White (2003), my coauthors and I used this data to estimate a model of the 2 In the latter study, bankrupts were classified as filing due to medical reasons whenever they reported $1,000 or more in medical expenses during the previous two years. But the average household with annual income of $22,000 to $40,000 spends $2,250 per year on health care, or $4,500 over two years. Bankrupts were also classified as filing due to medical reasons if they reported problems with alcohol, drugs, or gambling or if a birth or death occurred in the family, even if they did not state that these factors were reasons for filing. See Dranove and Millenson (2006). Table 1 Nonbusiness Bankruptcy Filings and Consumer Revolving Debt in the United States, 1980 –2006 Nonbusiness bankruptcy filings Real consumer revolving debt per household (in 2006 dollars) 1980 287,000 $1,664 1985 341,000 $2,687 1990 718,000 $3,943 1995 874,000 $5,927 2000 1,217,000 $7,637 2001 1,452,000 $7,537 2002 1,539,000 $7,679 2003 1,625,000 $7,591 2004 1,563,000 $7,635 2005 2,039,000 $7,544 2006 598,000 $7,694 Sources: Bankruptcy filings are taken from American Bankruptcy Institute (2007a). Data on revolving debt and the consumer price index are taken from Economic Report of the President 2007, tables B-77 and B-60. The number of U.S. households (used to calculate real revolving debt per household) is from the U.S. Census Bureau, Current Population Reports, table 57. Notes: Bankruptcy filings in the United States may be by an indi- vidual or a married couple. Michelle J. White 177 household bankruptcy filing decision that tested the importance of adverse events. We did not find a significant relationship between bankruptcy filings and either job loss or health problems for the household head or spouse, although we did find that bankruptcy was more likely to occur if the household head had recently been divorced. In any case, adverse events do not provide a good explanation for the dramatic increase in bankruptcy filings, because such events have not become much more frequent over time. The unemployment rate was 9.7 percent in 1982, fell to 5.6 percent in 1990, and since then has fluctuated between 4.0 and 7.5 percent. The divorce rate also declined, from 5.2 per 1,000 in 1980 to 3.8 per 1,000 in 2002. Medical costs also can’t explain the increase in bankruptcy filings. Out-of-pocket medical expenditures borne by households increased only slightly as a percent of median U.S. family income, from 3.5 percent in 1980 to 3.9 percent in 2005 (U.S. Census Bureau, 2007, table 120). The percentage of Americans not covered by health insurance has also remained fairly steady: it was 14.8 percent in 1985, 15.4 percent in 1995, and 15.7 percent in 2004 (U.S. Census Bureau, 1990 and 2007, table 144). The availability of casino gambling is another possible explanation for the increase in bankruptcy filings: specifically, casinos existed only in Nevada and New Jersey in 1980 but had spread to 33 states by 2000. Barron, Staten, and Wilshusen (2002) found that bankruptcy filing rates were 2.6 percent higher in counties that contained a casino or were adjacent to a county with a casino than in counties that were further from the nearest casino. However the effect was fairly small: if gambling was abolished all over the United States, their model predicts that bankruptcy filings would fall nationally by only 1 percent. Sullivan, Warren, and Westbrook (2000) also argue that bankruptcy filings increased over time because bankruptcy has become a middle-class phenomenon, so that households in a much larger portion of the income distribution now file. However, surveys show that, since the early 1980s, the median income of bankrupts has fallen rather than risen relative to the U.S. median family income level. Sullivan, Warren, and Westbrook (1989) found that the median income of filers in 1981 was 70 percent of U.S. median family income that year; while in a later survey, Sullivan, Warren, and Westbrook (2000) found that the median income of filers in 1991 had fallen to 50 percent of the U.S. median family income level. In the largest and most recent survey, Zhu (2007) found that the median income of filers in 2003 was only 49 percent of U.S. median family income level that year. Thus, the evidence suggests that the typical bankrupt has become poorer over time, not more middle class. From Credit Cards to Rising Bankruptcy Filings In the bankruptcy survey of the Panel Study of Income Dynamics, the most common reason that households gave for filing for bankruptcy was “high debt/ misuse of credit cards”—33 percent gave this as their primary reason for filing. A 178 Journal of Economic Perspectives 2006 survey of debtors who sought credit counseling prior to filing for bankruptcy found that debt was even more important: two-thirds were in financial difficulty because of “poor money management/excessive spending” (National Foundation for Credit Counseling, 2006). In addition, all of the empirical models of the bankruptcy filing decision have found that consumers are more likely to file if they have higher debt. Domowitz and Sartain (1999) found that households are more likely to file as their credit card and medical debt levels increase. Gross and Souleles (2002a) similarly found that credit card holders are more likely to file as their credit card debt increases. In Fay, Hurst, and White (2002), my coauthors and I found that households are more likely to file as their financial gain from filing in- creases—where the financial gain from filing mainly depends on how much debt would be discharged in bankruptcy. Since both our study and the Gross and Souleles (2002a) study include dummy variables for each year, the results of these studies suggest that debt is not just acting as a proxy for some other factor affecting bankruptcy filings that increases over time, but is itself an important explanation for the increase in filings. International comparisons also suggest a connection between credit card debt and bankruptcy filings. Ellis (1998) uses the comparison between the United States and Canada to argue for the importance of credit card debt in explaining the increase in bankruptcy filings. General credit cards were first issued in 1966 in the United States and in 1968 in Canada. In Canada, both credit card debt and bankruptcy filings increased rapidly starting in 1969. But in the United States, usury laws in a number of states limited the maximum interest rates that lenders could charge on loans, which held down their willingness to issue credit cards. U.S. bank- ruptcy filings remained constant throughout the 1970s. In 1978, however, the U.S. Supreme Court effectively abolished state usury laws in the Marquette decision, and after that, both credit card debt and bankruptcy filings increased rapidly in the United States. 3 Mann (2006) documents a similarly close relationship between credit card debt and bankruptcy filings in Australia, Japan, and the United Kingdom. Livshits, MacGee, and Tertilt (2006) use calibration techniques to examine various explanations for the increase in bankruptcy filings since the early 1980s. They find that only the large increase in credit card debt combined with a 3 In Marquette National Bank of Minneapolis v. First Omaha Services Corp. (435 U.S. 299 [1978]), the U.S. Supreme Court held that states cannot regulate interest rates charged on credit card loans if the lender is an out-of-state bank. After this decision, banks that issue credit cards quickly moved to states such as South Dakota and Delaware that had abolished their usury laws. A later decision by the Supreme Court, Smiley v. Citibank (South Dakota), N.A. (517 U.S. 735 [1996]), used the same reasoning to prevent states from regulating credit card late fees. Two additional changes that occurred in the United States in 1978 could also have caused bankruptcy filings to increase: the adoption of a new U.S. Bankruptcy Code and the legalization of lawyer advertising, which caused lawyers to begin advertising the availability of bankruptcy. But while these factors could have been responsible for a one-time increase in bankruptcy filings, they are unlikely to explain the steady increase over the past 25 years. Bankruptcy Reform and Credit Cards 179 reduction in the punishment for bankruptcy can explain the increase in bank- ruptcy filings since the early 1980s. Finally, mortgage debt has also grown rapidly since 1980, although the growth rate of mortgage debt is well below the growth rate of revolving debt; that is, real mortgage debt per household tripled between 1980 and 2006, while real revolving debt per household grew by a factor of 4.6 over the same period. The increase in mortgage debt and the increase in bankruptcy filings are related in several ways: First, homeowners often file for bankruptcy to delay mortgage lenders from fore- closing on their homes. Second, although mortgage debt is not discharged in bankruptcy, homeowners may want to file because having their consumer debt discharged makes it easier for them to meet their mortgage obligations. Finally, debtors may file for bankruptcy if their mortgage lender has already foreclosed and the house has been sold for less than the amount owed. In this situation, debtors in some states are liable for the difference, but the debt can be discharged in bankruptcy. For more discussion of these interactions between mortgage debt and consumer debt, see Berkowitz and Hynes (1999) and Lin and White (2001). Overall, the increase in credit card and possibly mortgage debt levels since 1980 provides the most convincing explanation for the increase in bankruptcy filings in the United States. But adverse events and debt levels interact with each other in explaining the increase in bankruptcy filings because, as debt levels increase, any particular adverse event is more likely to trigger financial distress and bankruptcy. The Evolution of Credit Card Markets Given the apparent connection between the expansion in credit card debt and the rise in bankruptcy filings, it’s useful to review how markets for credit cards have evolved in recent decades. My discussion here draws on Ausubel (1997), Evans and Schmalensee (1999), Moss and Johnson (1999), Peterson (2004), and Mann (2006). Until the 1960s, consumer credit generally took the form of mortgages or installment loans from banks or credit unions. Obtaining a loan required going through a face-to-face application procedure with a bank or credit union employee, explaining the purpose of the loan, and demonstrating ability to repay. Because of the costly application procedure and the potential embarrassment of being turned down, these loans were generally small and went only to the most creditworthy customers. 4 This pattern began to change with the introduction of credit cards in 1966, since credit cards provided unsecured lines of credit that consumers could use at any time for any purpose. The earliest credit cards were issued by banks where consumers had their checking or savings accounts. Because most states had usury laws that limited maximum interest rates, banks offered credit cards only to 4 Consumers during this period could also obtain installment loans from stores and car dealers to purchase durable goods and cars. These loans went to less-creditworthy borrowers and often had high interest rates and fees (Caplovitz, 1974). 180 Journal of Economic Perspectives the most creditworthy consumers, and card use therefore grew only slowly. But after the Marquette decision in 1978, credit card issuers could charge higher interest rates, and they expanded in states where low interest rate limits had previously made lending unprofitable. Over time, the development of credit bureaus and computerized credit scoring models changed credit card markets, because lenders could obtain information from credit bureaus about individual consumers’ credit records and could there- fore offer credit cards to consumers who had no prior relationship with the lender. Lenders first offered credit cards to consumers who applied by mail, and then began sending out pre-approved card offers to lists of consumers whose credit records were screened in advance. These innovations reduced the cost of credit both by eliminating the face-to-face application process and by allowing lenders to expand nationally, which increased competition in local credit card markets. From 1977 to 2001, the proportion of U.S. households having at least one credit card rose from 38 to 76 percent (Durkin, 2000). Over the same period, revolving credit increased from 16 to 37 percent of nonmortgage consumer credit, which means that credit card loans gradually replaced other forms of consumer credit. This shift from installment to revolving loans meant dramatic changes in the terms of consumer debt. Secured and installment loans typically carried fixed interest rates and fixed repayment schedules. Credit card loans, in contrast, allow lenders to change the interest rate at any time and allow debtors to choose how much they repay each month, subject to a low minimum repayment requirement. Consumers who repay in full each month use credit cards only for transacting; they receive an interest-free loan from the date of the purchase to the due date of the bill. In contrast, consumers who repay less than the full amount due each month use credit cards for both transacting and borrowing; they pay interest from the date of purchase. If borrowers pay late or exceed their credit limits, then lenders raise the interest rate to a penalty range and impose additional fees. Credit card issuers compete heavily for new customers by mailing out unsolic- ited, pre-approved credit card offers: in 2001, the average U.S. household received 45 of these offers (Bar-Gill, 2004). Over time, competition among issuers has led them to offer increasingly favorable introductory terms and increasingly onerous post-introductory terms. The favorable introductory terms include zero annual fees, low or zero introductory interest rates on purchases and balance transfers, and rewards such as cash back or frequent flier miles for each dollar spent. The favorable introductory terms encourage consumers to accept new cards, while the rewards programs encourage them to charge more on the cards and the low minimum repayment requirements encourage them to borrow. The format of the monthly bills also encourages borrowing, since minimum payments are often shown in large type while the full amount due is shown in small type. Minimum monthly payments are low—typically the previous month’s interest and fees plus 1 percent of the principle—which means that debtors who pay only the minimum each month still owe nearly half of any amount borrowed after five years. After the Michelle J. White 181 introductory period, terms become much more onerous: the average credit card interest rate is 16 percent, interest rates rise to 24 to 30 percent if debtors pay late, and penalty fees for paying late or exceeding the credit limit are around $35. This pattern of credit card pricing implies that issuers make losses on new accounts and offset their losses with profits on older accounts (Ausubel, 1991, 1997; Bar-Gill, 2004). Credit card issuers have also expanded their high-risk operations by lending to consumers who have lower incomes, lower credit scores, and past bankruptcy filings. The percentage of households in the lowest quintile of the income distri- bution who have credit cards rose from 11 percent in 1977 to 43 percent in 2001 (Durkin, 2000; Johnson, 2005). Three-quarters of bankrupts also had at least one credit card within a year after filing (Staten, 1993). The shift of consumer debt from installment debt to credit card debt, com- bined with the pattern of credit card pricing, has made consumers’ debt burdens much more sensitive to changes in income. When consumers’ incomes are high, they are likely to pay their credit card bills in full, and therefore their debt burden is low and they pay little or no interest. But when incomes decline, consumers are likely to pay late or to pay the minimum on their credit cards, so that their debt burdens increase and they pay much more in interest and fees. Although credit cards allow consumers to smooth consumption when their incomes fall, the cost of doing so is extremely high and may cause some debtors to enter a state of ongoing financial distress. Rational Consumers versus Hyperbolic Discounters Considerable recent research suggests that consumers fall into two groups based on their attitudes toward saving: rational consumers versus hyperbolic dis- counters. Rational consumers apply the same discount rate over all future periods. Hyperbolic discounters, in contrast, want to save more starting at some point in the future, but in the present they prefer to consume rather than save (Laibson, 1997). In another context, a hyperbolic discounter can be a person who always wants to start dieting tomorrow, but never today. As credit card loans have become more widely available and borrowing opportunities have increased, the difference be- tween rational consumers and hyperbolic discounters has become more important. Laibson, Repetto, and Tobacman (2003) found in simulations that hyperbolic discounters borrow more than three times as much as rational consumers, regard- less of whether both types pay the same interest rate or hyperbolic discounters pay higher rates. Applying these results to credit card pricing suggests that rational consumers are likely to use credit cards purely for transacting, while hyperbolic discounters are more likely to use them for borrowing. Also, allowing consumers to choose how much to pay on their credit cards each month makes it likely that hyperbolic discounters will accumulate high levels of credit card debt, because each month they resolve to start paying off their debt, but when the next bill arrives they consume too much and postpone repaying for another month. Because hyperbolic 182 Journal of Economic Perspectives discounters borrow more on their credit cards than rational consumers, they are also more likely to pay high interest rates and penalty fees. Thus, hyperbolic discounters are more likely than rational consumers to accumulate steadily increas- ing credit card debt. Gross and Souleles (2002b) provide evidence supporting the hyperbolic dis- counting model in the context of credit cards—specifically, they find that card- holders increase their borrowing in response to interest rate reductions by more than they reduce their borrowing in response to interest rate hikes. This suggests why lenders offer low introductory interest rates to attract new customers and charge high rates later to their existing cardholders. Again, these results suggest that most debtors in financial distress are likely to be hyperbolic discounters rather than rational consumers who have experienced adverse events. U.S. Bankruptcy Law U.S. bankruptcy law has traditionally had two separate personal bankruptcy procedures named, after parts of the bankruptcy law, Chapter 7 and Chapter 13. Under both procedures, creditors must immediately terminate all efforts to collect once debtors file for bankruptcy. Most consumer debt is discharged in bankruptcy, but tax obligations, student loans, alimony, child support obligations, debts in- curred by fraud, and some credit card debt incurred shortly before filing are not discharged. Mortgages, car loans, and other secured debts are also not discharged in bankruptcy, but filing for bankruptcy generally allows debtors to delay creditors from foreclosing or repossessing assets. The main difference between the two Chapters is that Chapter 7 only requires bankrupts to repay from their assets and Chapter 13 only requires them to repay from future income. Prior to the Bank- ruptcy Abuse Prevention and Consumer Protection Act of 2005, debtors were allowed to choose between the two procedures. Bankruptcy Law Before 2005 The most commonly used procedure before the 2005 law was Chapter 7. Under it, bankrupts must list all of their assets. Bankruptcy law makes some of these assets “exempt,” meaning that debtors are allowed to keep them. Asset exemptions are determined by the state in which the debtor lives. Most states exempt debtors’ clothing, furniture, “tools of the trade,” and some equity in a vehicle. In addition, nearly all states have homestead exemptions for equity in owner-occupied homes, which vary from a few thousand dollars to unlimited in six states, including Texas and Florida. Many states also allow debtors an unlimited homestead exemption if they are married, only one spouse files for bankruptcy, and they own their homes as “tenants by the entirety.” Elias (2006) provides a list of asset exemptions by state. Under Chapter 7, debtors must give up all of their nonexempt assets, which are Bankruptcy Reform and Credit Cards 183 used to repay creditors. But they are allowed to keep all of their post-bankruptcy income. Under the alternative procedure, Chapter 13, bankrupts are allowed to keep all of their assets, but they must use some of their post-bankruptcy income to repay. Before the 2005 law, there was no predetermined income exemption; instead, debtors who filed under Chapter 13 proposed their own repayment plans. They often proposed to repay an amount equal to the value of their nonexempt assets in Chapter 7 or, if all of their assets were exempt, then they proposed to repay a token amount. Debtors were not allowed to repay less than the value of their nonexempt assets, and since they could file under Chapter 7, they had no incentive to offer more. Only the approval of the bankruptcy judge—not creditors—was required. The costs of filing for bankruptcy used to be low—about $600 in Chapter 7 and $1,600 in Chapter 13 as of 2001 (Flynn and Bermant, 2002). Compared to other countries (see below), the bankruptcy punishment was also low—bankrupts’ names are made public, the bankruptcy filing appears on their credit records for 10 years, and their access to credit falls. In addition, bankrupts were not allowed to file again under Chapter 7 for six years (but they were allowed to file under Chapter 13 as often as every six months). To induce more bankrupts to file under Chapter 13 and repay from future income, U.S. bankruptcy law used to allow additional debt to be discharged under Chapter 13. Debtors’ car loans could be discharged to the extent that the loan principle exceeded the market value of the car. Also, debts incurred by fraud and cash advances obtained shortly before filing could be discharged in Chapter 13, but not in Chapter 7. These features were known as the Chapter 13 “super-discharge.” Some bankrupts took advantage of the super-discharge by filing first under Chapter 7, where most of their debts were discharged, and then converting their filings to Chapter 13, where they proposed a plan to repay part of the additional debt covered by the super-discharge. This two-step procedure, known as filing a “Chap- ter 20,” increased debtors’ financial gain from bankruptcy relative to filing under either procedure by itself. Overall, these features made earlier U.S. bankruptcy law very pro-debtor. Because debtors could choose between Chapters 7, 13, and “20”, they generally picked the procedure that maximized their gain. Since most debtors have few nonexempt assets, their gain was generally highest under Chapter 7, and around three-quarters of all bankruptcy filings were in fact under Chapter 7 (American Bankruptcy Institute, 2007b). But this choice meant that most bankrupts had no obligation to repay from future income, regardless of how high their incomes were. Debtors with high assets could also gain from filing under Chapter 7, as long as they planned in advance to convert their nonexempt assets to exempt before filing. They could do this by using nonexempt assets to pay down their mortgages, if the additional home equity would be exempt under the state’s homestead exemption, or by moving to a state with a high homestead exemption and using their nonex- 184 Journal of Economic Perspectives [...]... to take a credit counseling course before they file and a financial management course before their debts are discharged They must file detailed financial information with the bankruptcy court, including copies of their tax returns for the past four years (which may mean they have to prepare and file tax returns that they never filed in the past) Bankruptcy lawyers must certify the accuracy of all the information... multiple creditors also reduces creditors’ incentives to race to be first to collect See White (2008) for discussion Bankruptcy Reform and Credit Cards 191 bankrupts were forced to give up all of their assets to repay creditors and there was no debt discharge, so they remained liable to repay for the rest of their lives As the cost of lending fell, the death penalty, slavery, prison, and other severe... debt The first U.S bankruptcy law, adopted in 1800, also allowed for debt discharge if a majority of creditors consented Asset exemptions appeared as early as the 1790s, when Virginia and other southern states adopted them to protect local landowners from their northern creditors Exemptions became more widespread and more generous in the nineteenth century, when states in the South and West used them... their credit cards For example, Senator Christopher Dodd introduced legislation in 2004 that would require credit card lenders to inform consumers each month how long it will take to repay their loans if they pay only the minimum amount Mann (2006) proposed that payment terminals for credit card transactions be modified so that each time consumers use their credit cards, they would be told whether the. .. similar to France’s but the repayment period is six years rather than eight to ten and the income exemption is higher Debtors are required to use all of their income above the exemption to repay, but if they exhibit good behavior by working or seeking work, they are allowed to keep 10 percent of their nonexempt income during the fourth year of the repayment plan and 15 percent during the fifth year All bankrupts... repay, 5) the length of the repayment obligation, 6) bankruptcy costs, and 7) the bankruptcy punishment A bankruptcy policy is more prodebtor if the amount of debt discharged or the exemption levels are higher, or if bankruptcy costs, the bankruptcy punishment, the length of the repayment period, or the fraction of nonexempt income that must be used to repay are lower Table 2 summarizes these parameters... point, many of them will discover that they are unable to file, either because they cannot afford the high bankruptcy costs or because they have filed under Chapter 7 within the past eight years Also once in bankruptcy, hyperbolic discounters are more likely to have difficulty providing the detailed information that the new bankruptcy law requires, including four years’ of past tax returns that they may have... Coordinating Bankruptcy with Other Policy Tools Bankruptcy law and other types of regulation should be coordinated in a combined credit market policy that covers both the borrowing and the repayment stages Thus, since the U.S bankruptcy system has shifted in a pro-creditor direction, other types of regulation should also be changed so as to discourage debtors from borrowing to the point that they are likely to... obligation to repay Punishments therefore were severe Among the punishments that have been used in various countries at various times are the death penalty, selling bankrupts and their children into slavery, forcing bankrupts to become indentured servants of their creditors, putting them in prison, flogging, branding, cutting off their hands, exiling them, and publicly shaming them in various ways (Efrat,... bankruptcy-provided debt relief will be unable to file because they cannot afford to pay the higher costs of bankruptcy, including lawyers’ fees, filing fees, and the other costs of filing Second, because BAPCPA changed bankruptcy law in a pro-creditor direction, credit card issuers have responded by expanding the supply of credit But more credit card loans combined with reduced access to debt relief . distress and bankruptcy. The Evolution of Credit Card Markets Given the apparent connection between the expansion in credit card debt and the rise in bankruptcy. or credit union employee, explaining the purpose of the loan, and demonstrating ability to repay. Because of the costly application procedure and the potential